The Trust Project at Northwestern University

Explore Trust in Research, Business and Society

The Trust Project at Northwestern University aims to create a unique body of knowledge about Trust by connecting scholars and executives from diverse backgrounds to share ideas and research. Featuring academics from across Northwestern University and executives from across industries, the videos represent different perspectives on Trust and connect research findings to real-world scenarios.

The videos cover three core areas:

Foundations

Trust in Transactions: An Economist's Perspective

Niko MatouschekEconomicsEconomic Exchange,Economics,Legal Guarantees,Long Term Focus,Mergers and Acquisitions,Regulation,Reputation Management,Social PsychologyTrust is an issue that most people don’t associate with economics, yet economists actually care a great deal about trust. And they care a great deal about trust because, in the absence of trust, many value-creating transactions simply wouldn’t take place.

To take the quintessential economic transaction as an example — if you (the buyer) don’t trust me (the seller) not to sell you a lemon, then you won’t buy from me in the first place. And you won’t buy from me even if, in principle, I could make a product that you value more than it costs me.

And so, trust matters to economists because it enables and facilitates transactions that create value and therefore are good for all of us.

Or the other way around — trust matters because the absence of trust is an impediment to growth. It’s an impediment to growth in employment, wages and profits, and therefore makes us all worse off.

To be sure, not all transactions require trust. If, for instance, you can verify on the spot whether I’m selling you a lemon or not, then our transaction doesn’t require any trust. Or, alternatively, if we can write a contract that ensures I’m not selling you a lemon, then, again, we don’t need any trust between us to transact.

The problem is that in many situations, that’s not the case. In many situations, you can’t verify on the spot whether I’m selling you a lemon or not, and writing a contract is either costly or even impossible.

And in such situations, transactions do require trust. What the economic literature on trust tries to understand is how markets function when transactions do indeed require trust.

BUMPER: Rationality and Trust: "Good Types"

To explore how markets function when transactions require trust, it’s useful to start by asking yourself when and why it’s rational for market participants to trust each other — that is, to believe that the other side is going to follow through with their promise, even if it’s not in their immediate economic interest to do so.

There are really two reasons for why it may be rational for you (the buyer) to trust me (a seller). One is that you may think that I’m what’s called a “good-type” or a “virtuous-type seller” — that is, I’m not really a coldhearted homo economicus who, at any moment in time, tries to maximize his profits.

Instead, I’m somebody who incurs, essentially, a psychic cost from not doing what I’ve said I was going to do. Even if there’s just a small number of these virtuous sellers — these virtuous sellers are in short supply, as you might think they are — they can still have significant impacts on how markets work.

One implication comes from the fact that if you’re a virtuous seller, you have a competitive advantage over regular rational ones.

If you’re known to be a virtuous seller, buyers want to transact with you. And to compete, the regular rational sellers have to create essentially contractual alternatives for trust that are both costly and typically imperfect substitutes for trust.

And so, somewhat paradoxically to being committed not to maximize your profits at any moment in time actually increases your profits. And so, being virtuous is not just good for your soul, if you want, it’s also good for your bottom line.

And that’s why virtuous sellers, or so-called virtuous sellers, can play an important role in a market, even if there’s just a small number of them.

Economic historians, for instance, sometimes argue that one of the reasons for why the Quakers played such an important role in the British economy in the 18th century is because they were known to be trustworthy.

And so, people knew that they would keep their promises, even if it were not in their immediate economic interests to do so. That put them into a competitive advantage vis-à-vis other business people and led to them playing a disproportionately important role in the economy.

BUMPER: Rationality and Trust: Good Incentives

A second implication of having virtuous sellers in the market is that if there’s uncertainty about who is who — who is virtuous and who is rational — then the rational sellers have an incentive to try to mimic the virtuous ones.

That’s going to be costly for them today because they have to forego some profit opportunities today, but then they reap the benefit of being perceived as virtuous tomorrow.

There’s a large literature on reputation games in economics, as it tries to understand the incentives, how they play out, what extent there is scope for this mimicking behavior, and how the mimicking behavior affects the functioning of markets — whether it’s overall good for the market or whether it’s bad for the market.

Now, suppose that you know that I am a coldhearted homo economicus; can it still be rational for you to trust me? And the answer is yes, provided that I care not only about today’s transaction with you but also about future transactions, either with you or with others.

In deciding whether to honor my promise to you, then, I face a trade-off. By breaking that promise today, I can make more money today, but now it comes at a cost of less future business, essentially.

As long as I care enough about the future, it is then rational for me to keep my promise to you. And since it’s rational for me to keep my promise to you, it’s rational for you to trust me in the first place.

Repeated interactions, then, can allow a coldhearted homo economicus — somebody who’s known to be a rational agent — to commit to behave as if he were a virtuous one and to do so without having to rely on any formal contracts.

Now, for that to work, two things have to be true, generally speaking: One is I, that seller — that coldhearted seller — have to care enough about the future. And two, there has to be enough transparency, in the sense that current consumers can observe enough about how I’ve treated past consumers.

And there’s a large literature on repeated games in economics that tries to understand exactly when and how these reputation mechanisms that work through repeated interaction operate.

In summary, then, there are two strands in the literature: one focuses on good types, and one focuses on good incentives. And together, they have a number of implications and shed light on a number of economic issues and phenomena.

Research

How Credit Systems Guarantee Trust: Key Findings

Bruce CarruthersSociologyCredit,Government,Measurement,RegulationTrust is an everyday problem. It’s ubiquitous. It’s something that we face all the time, but it’s not always something that we consciously think about.

These kinds of practical rules of thumb really drive the kind of calculative, quick evaluative decisions that cab drivers make every day, thousands of times.

So, credit is a big thing, and trust in credit is an absolutely crucial issue.

Lenders are vulnerable to the borrowers, depending on the size of the loan, and they’re uncertain about whether the borrowers will be willing and able to repay the loan in the future.

And the thing about credit is that modern economies absolutely depend on credit. Credit is the lifeblood of the consumer economy.

There would be no housing market; there would be no market in cars; there would be no sales and durable goods if people weren’t able to borrow money through credit cards, through mortgage loans, through car loans, and so forth to facilitate those purchases.

So, in the issue of credit, sociologists have studied how lenders actually evaluate the trustworthiness of potential borrowers. And this is done by some people in the context of bankers who are looking at customers who want personal loans or who want small-business loans — stuff like that.

And what they found is that the bankers also were concerned deeply about the trustworthiness of the borrowers.

So, they do collect a lot of data. But it turns out that even when you’ve got all the quantitative information you possibly want — you’ve got the credit scores; you’ve got the loan-to-value ratio; you’ve got all that kind of stuff — it still turns out that sometimes the numbers are equivocal.

What are called “relational proxies” become very important. And that’s a situation where the lending officer will kind of ask themselves, “Do I trust this borrower? Do I think that they are of good character? Do I believe that they’re being really sincere when they say that they plan to repay the loan?”

Those studies of credit focus on situations where lenders and borrowers can actually meet face-to-face, or one person can look across the table at another person and decide whether they’re trustworthy.

But we know that credit in modern society has become much bigger than that. It now is mass credit. Millions and even billions of people are obtaining credit, and they’re getting it from folks who have never met them, will never meet them, and will never sit across the table from them.

How is this possible? Well, the answer is, what we have developed to manage the trust problems in mass credit is a giant informational apparatus that provides lots of information about would-be borrowers and their trustworthiness to would-be lenders and doesn’t depend so much on face-to-face interactions and direct contact.

So, the importance of this kind of informational apparatus is really made obvious in studies of how credit card systems, which are very common in the West and which have been around in the U.S. since the 1950s, have migrated to the post-socialist societies of Central and Eastern Europe — places like Russia.

And what happened was, it turns out that to build a credit card system in Russia is very difficult as compared to the United States.

It turned out that a lot of this background information system that we in the West rely on to track people’s credit records, to keep score of whether they bounce checks and whether they fall behind on payments and how good they are and how in debt they are — that apparatus didn’t exist in places like Russia and had to be built from the ground up.

And it’s that apparatus much more than old, face-to-face direct contact between lenders and borrowers that proves to be critical for the development of mass credit in both Russia but also in the United States.

So, in my own research, I’ve been very interested in the emergence, the historical emergence, of this giant informational apparatus that undergirds modern credit cards. But it turns out it undergirds lots of other forms of credit as well: bond ratings, small business credit, and whatnot.

And the big shift that I see — that started in the middle of the 19th century and which continues to this day — is a shift from credit and issues of trust that previously was posed as a matter of character: Is somebody trustworthy? How do I know that someone in their heart is trustworthy and will repay the debts? How am I connected to that person directly?

We shifted from a world in which that was how you dealt with trust to a world in which, now, we don’t worry about whether we know someone, and we don’t worry so much about their character. But we rely very heavily on all kinds of quantitative, standardized information that has been gathered and processed and interpreted by someone.

It’s no longer a world in which you as a lender have to worry about the five or ten or twenty people that you can know personally a lot about. Now you can scale it up so that you can judge the creditworthiness of millions of people — billions of people! — millions of businesses.

It’s also information that migrates in the sense that it can be used in other contexts. And so, when bond ratings were invented, they got adopted by regulatory agencies. So, public policy became beholden to bond ratings, and they got used in private contracts.

So, FICO scores, credit scores, bond ratings — these are all highly quantitative ways of evaluating trustworthiness, and they really have become how credit and trust are governed in the modern world.

Applications

Building Trust by Learning to Listen

Kelly MichelsonPediatricsHealthcare,Reciprocity,RegulationThe pediatric intensive care unit can be a very complicated place with a lot of players — there’s doctors, nurses, social workers, chaplains; there’s a lot of people just in the PICU itself.

And then for a particular patient, there may be even more physicians — subspecialists, other providers, just a lot of people running around all the time and people changing over.

I think each component of this VALUE mnemonic is important: we want to value what the family is saying; we want to acknowledge whatever emotions the family is going through; we want to listen; we want to understand where the family is coming from; and we want to elicit questions from the family so that we know that they understand as well.

If I had to focus in on one or two things, I would highlight two. And the first is the L for listen.

When we’re having these conversations, one of the ways that we can help support families is to stop talking and hear what they have to say, even if it means silence, because sometimes it’s in the periods of silence that families realize what they can or feel like they need to say.

And then, the other piece of it that I think is really important and sometimes doesn’t get as much attention is the piece about getting to know the patient or the family or what their issues are — asking them sometimes personal questions about why they feel a certain way, why they’re making a particular choice, and even personal questions about what their situation is like, whether it’s unrelated to the actual decision or discussion that’s going on.

I think it’s really helpful to know that the patient likes to swing on the swing.

And that kind of conversation fosters a lot of trust and support from both sides. So, now the mother knows that I care about her child, or the father knows that we care about their child.

And the healthcare provider also has a personal investment in this particular patient because now I can see what this patient looks like swinging on the swing, and I have a whole different perspective after that kind of information.

BUMPER: Learning to Trust Your Patients

In pediatrics, it’s rarely the patient who decides — sometimes, but rarely — it’s often the parent.

In an ideal world, we’re all making decisions that are important for this patient; we’re not even making decisions necessarily about ourselves. So, when you feel like you don’t have trust for a parent who’s making a decision about a patient, it can be very challenging.

And I think that one of the things that can help mitigate some of those challenges and help smooth things over is to really focus on understanding why the parent is doing or saying what they’re doing, where their behavior comes from.

And I can give you an example. There’s a parent in the intensive care unit whose child has a cancer that’s metastasized and who will likely die — their child will likely die.

And this parent has very difficult interactions with the healthcare team and is often questioning things and doing things in a way that you can’t imagine how that’s helping their child.

But I think that if we understand what the perspective of that particular parent is and why he or she feels that way, and if we look back and we realize that maybe it took this particular parent two months to get their child into the hospital and they feel guilty about that and that they impacted the outcome and that a lot of those emotions influence how they behave, I think it can help unpack the situation.

Really trying to understand the perspective of the parent can be useful when there’s a sense of distrust about what the parent is doing and why.